Posted Aug 2017
Over the last 12/18 months there has been a flow of clients contacting me about calls received from various solar companies offering large rents for farmlands to install PV solar panels – and not all are from the Sunny South East!
In recent years electricity generated from solar has become much more attractive due to the massive drop in the cost of solar panels and increase in efficiencies. In addition, the State’s obligations to meet climate change targets makes the rise of renewable energy inevitable. Developments in battery storage help reduce the downsize of fluctuating output from PV solar and allow storage and more consistent flow into the grid. Used in conjunction with wind this could be a game changer in renewable energy nationally.
However, too frequently clients are blinded by the headline “Gross Rental Figure”. On the face of it solar provides a vastly better return than from any other agricultural enterprise. Money for old rope! For many, if a PV solar lease is entered into and rents starts flowing, it is certainly a very attractive option.
If you are approached by a solar company I am not suggesting that you send them away with a flea in their ear! But before getting too carried away with the promise of large rental income consider the following:
1. REFIT Tariff/Grid/Planning/Finance
The approval of the refit tariff subsidy has been continuously pushed back. I understand progress has been made on this and announcements are expected fairly shortly. However for a variety of reasons it looks like the larger solar developments are most likely the ones that will ultimately succeed. Solar companies also have to overcome the triple hurdles of obtaining a grid connection, planning permission and substantial financing. Larger developments and economies of scale will win the day. All of this has to happen before a watt of electricity is generated and a penny paid to you in rent.
2. Tax on Income
The rental income from the solar lease is treated as a different income class to that of farming. A farmer cannot offset the usual expenditure that they can for farm income. For many people this could mean that their rental income is subject to 50% tax.
3. Loss of Entitlements
There is some debate as to whether or not the Department of Agriculture will allow entitlements to be claimed on land that is leased for solar. Currently under certain circumstances provided that less than 30% of the land leased is covered in solar panels payment may be made on the rest. Some agreements with solar companies may indemnify the farmer against this loss.
4. Agricultural Relief
As the law currently stands, land that is contained in a solar lease and has solar panels built on it will not be eligible for Agricultural Relief on gifts or inheritances of farmland to the next generation. Agricultural Relief is a fantastic way to reduce gift/inheritance tax. In theory you can gift €3.1 million worth of farmland, stock and machinery to each of your children tax free but only €310,000 if you cannot claim Agricultural Relief. For a number of our clients, the potential inability of a beneficiary to claim Agricultural Relief on lands with solar – whether through a transfer while the farmer is still alive or in death, and potentially substantial inheritance/gift tax bills. There are some ways around this but these generate their own problems. Several suggestions have been put forward to get around this particular difficulty but the jury (but more importantly, the Revenue) is still out on this. However the Irish Farmers Association, amongst others, has made submissions to the government that land comprising solar leases continue to be deemed to be Agricultural Land and be eligible for tax relief.
Solar leases will place restrictions on what you can do on your lands and areas surrounding the leased land. This is so that the solar companies can protect the equipment from being overshadowed or damaged by other activities carried out on your land. It is important to negotiate reduced restricted area or specific carve outs when the option/lease is being entered into. Access road ways, conduits and potentially ESB Sub Stations may also impact on the lands not covered by the lease.
6. Duration of Lease
Many of the solar leases we have looked at allowed the solar companies to terminate the lease on a minimum of six months notice. Accordingly, there is no guarantee there will be a full term of 25 years or more. Given the potential changes in technology, REFIT tariffs and demand it is possible that in 10 or 15 years time when the anticipated REFIT tariffs have expired it may be more cost effective to generate solar electricity by other means and solar farm may then become redundant. However, you as the long owner cannot terminate the lease save where the solar company breaches its obligations under the lease i.e. to pay rent etc.
7. Other Options
Few other enterprises will give such a rate of return look at other options. In particular the benefits of Long term farm leasing – income tax exemption. Long term leasing of land to a farmer allows you to avail of a substantial income tax exemption which can generate in some circumstances net returns not enormously different than the net returns on solar leases and without many of the difficulties I have outlined in this piece. We always advise that a client meet with their accountant to prepare a schedule setting out the current and net farm income, potential net income on their solar lease and potential net income on a long term lease arrangement and use this to make an informed view on their options.
8. Making Money but when do I do in the Morning?
Many leases allow you to enter into a maintenance contract and/or a grazing licence to graze your sheep or poultry. If you have been a full time active farmer this may not be sufficient to keep you occupied and you will need to decide what you will be doing into the future and what will occupy your time. Also, if you wake up one day and decide you do not like the look of solar panels – tough – you could be looking at them for the next 25-30 years. This is why it is very important to engage with your family and take these things into consideration before entering into an option/lease.
9. Next Generation
If you enter into a 25 year lease or more this may prevent the next generation entering into farming if this is what they want to do. As stated above it also brings business succession and estate planning issues to the fore. Again this is why it is important to consider bringing all the family into the process.
If you don’t get on with your neighbours putting 30-100 acres of solar on your land won’t help matters. If you do get on with them that may change when the planning application goes in. Whilst the much talked about “community gain” suggested by many of the larger solar companies frankly this is not enough and was described by one land owner to me as the equivalent of the settlers offering guns and glass jewellery to the native land owner to buy them off. Solar companies and their representatives need to engage more fully with communities and put meaningful community gain structures in place.
If you are still interested…..
All of the above and more need to be considered by any farmer and the family before entering into an option/lease agreement. Yes – the returns from solar are certainly better than the returns you will get from agriculture use of the land.
These returns can be improved if additional payment can be obtained for a higher REFIT tariff, allowing electricity generated elsewhere to cross the leased lands onto the grid, the use of battery storage and additional payments arising from any increase in efficiencies.
However a solar lease does not come without a price and the farming family need to consider things very carefully before signing any documentation to include exclusivity agreement, grid connection, option and lease agreements.
Legal and taxation advice should also be obtained as you are entering into a long term arrangement that will impact not just on you but on the next generation as well.
If you have any queries please fee to contact us to discuss your situation.
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